All big US banks pass Fed's stress tests, immediately proceed to splurge on buybacks and dividends

Goldman Sachs CEO Lloyd Blankfein.
REUTERS/Gary Cameron
The Federal Reserve has approved plans from the 34 largest U.S. banks to use extra capital for stock buybacks, dividends and other purposes beyond a cushion against possible catastrophe.

On Wednesday, the Fed said all of the 34 banks had passed the second, tougher part of its annual stress test, showing that many of the biggest lenders have not only built up adequate capital levels but also improved their risk management procedures.

One bank, Capital One Financial Corp, must resubmit its scheme by year-end, though the Fed is still allowing it to go forward with its capital plan in the meantime.

Fed Governor Jerome Powell, who is acting as regulatory lead for the U.S. central bank, said the process "has motivated all of the largest banks to achieve healthy capital levels and most to substantially improve their capital planning processes."

The banks' own plans on how they will use extra capital will not be known until they make their own announcements.

The verdict marks a significant victory for the banking industry, which has worked for years to regain its stature following the 2007-2009 financial crisis. The green light could also serve as a watershed moment for Wall Street, which is eager to get a lighter regulatory touch from policymakers in Washington.

Capital One must resubmit plans because it did not appropriately account for risks in "one of its most material businesses," the Fed said.

The Fed did not specify which business. Capital One's most significant business is credit card lending. It has also built up a presence in auto lending. Both areas have been flagged by bankers and analysts as showing signs of weakness.

Capital One has until year-end to deliver an improved submission, but the Fed gave it permission to move forward with its plan until then. Capital One had already resubmitted a plan with a reduced capital request since the first set of stress-test results was released last week.

American Express Co had also resubmitted a plan with reduced requests, improving its capital ratios, and the Fed did not require it to resubmit again.